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How Digital Startups Will Develop the World

Local entrepreneurs are driving Internet growth in emerging markets, and that's a good thing. Here's how policy makers and telecom operators can help.
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This column is part of an ongoing series, originally published by McKinsey & Company, about how entrepreneurs are making a societal impact around the world.

In advanced economies, the efforts of innovative entrepreneurs have driven astounding growth in Internet usage and impact over the past 20 years. Internet entrepreneurship in emerging markets has received far less attention but has major implications for economic growth and social progress. We recently studied the impact of the Internet on “aspiring countries,” defined as having the economic size and dynamism to be significant players on the global stage in the near future and achieve levels of prosperity approaching those of the advanced economies.

We identified 30 aspiring countries worldwide, with a collective GDP in 2010 of $19 trillion, or 30 percent of global GDP. Many of these countries--for instance, China and Mexico--are already significant players in the global economy. However, none have achieved the per capita wealth and prosperity seen in advanced economies.

In 2010, the 30 countries in the aspiring category all had nominal GDP above $90 billion and nominal GDP per capita between $1,000 and $20,000. Nominal GDP per capita grew at a compound annual growth rate of more than 3 percent between 2005 and 2010.

Internet entrepreneurs in aspiring countries are often also social entrepreneurs, in that they create the ecosystem that allows individuals, enterprises, and governments to play a bigger role in the Internet economy. Increases in Internet use and infrastructure improvements have allowed entrepreneurs in aspiring countries to create new business models. From successful adaptations of popular Web applications from developed countries to e-commerce and public-policy platforms, entrepreneurs have brought new services, expanded products, and deeper content within reach of users in aspiring countries.

With about 150,000 Internet-related businesses started each year in aspiring countries, entrepreneurs have driven much of the growth of the Internet ecosystems. They are building the foundations that consumers and enterprises can then take advantage of. The Internet in aspiring countries also contributes to job creationIn the small- and medium-enterprise sector, survey respondents report that 3.2 jobs are created per 1 job lost because of the Internet.

Startups to Watch

Entrepreneurship in aspiring countries has been stimulated by demand for localized remedies to constraints such as logistical bottlenecks, low access to credit, and intermittent power supply. In Kenya, for example, the technology nonprofit Ushahidi has developed a device called the BRCK, described as a “backup generator for the Internet.” It aims to address the challenges of making connectivity more reliable--even when the power is out. The project’s aim is to keep users connected with minimal effort by moving seamlessly between wired ethernet, Wi-Fi, and mobile-data zones and switching to a robust built-in battery automatically whenever the power grid goes down.

Other common challenges include insufficient secure Internet servers per capita, low average bandwidth per capita, and limited penetration of PCs. Yet Internet entrepreneurs are adapting their business models to overcome these bottlenecks. In India, for instance, entrepreneurial ventures such as the job site Naukri.com use phone-based voice and text-message services to supplement their Web-based services, thus providing greater ease of access.

In many aspiring countries, the use of online financial transactions is still in its infancy and will develop only as critical enablers--such as legal protection against fraud--become stronger. In India, online ticket-sales sites such as Redbus.in offer customers the option of cash payment upon physical delivery of online purchases as an alternative to using credit cards in a system perceived to be insecure. We see similar innovation around logistical bottlenecks. For example, one of India’s largest online retail players, Flipkart.com, has developed its own logistics operations to save on courier commission charges and reduce delivery time in smaller cities.

In Mozambique, meanwhile, a startup called moWoza uses text messaging and a smartphone app to connect informal traders with available taxi drivers who can deliver parcels from wholesalers, creating a faster, mobile-based supply chain. The company aims to make cross-border trade more formal and efficient, positioning itself as a major m-commerce player that can provide tracking and delivery services.

Many startups in aspiring countries have replicated successful business models created in developed markets while simultaneously adapting them to unique local conditions. Turkey, for example, boasts a young but growing sector of daily-deals startups modeled on Western companies such as Groupon and Living Social. Other aspiring-country entrepreneurs have developed products that have the potential to reach global markets. Hungary’s Prezi is a cloud-based tool that enables users to create presentations as if they were on one large canvas rather than a series of slides. Prezis are created to tell stories, with the presentation zooming back and forth to different portions of the canvas. Prezi grants free access to its services to customers who allow Prezi to publish their work. Customers who want private presentations can opt to pay for premium services. First developed in 2007, Prezi has since received funding from the TED conference series and from Denmark’s Sunstone Capital.

Still other ventures address social challenges ranging from urban traffic to public health and safety. In 2010, a team of young Egyptian entrepreneurs launched Bey2ollak, a mobile and Web-based application that offers real-time, crowdsourced traffic updates. The idea was conceived as a response to the founders’ frustration with Cairo traffic. The day the application was launched, it gained 5,000 users and a partnership offer from Vodafone Egypt. The service attracted 46,000 registered users in less than a year.

Virtuous Cycles

In most developed countries, the Internet has achieved a virtuous cycle. With the appropriate infrastructure and a broad user base, Internet entities thrive by providing products and services to generate revenue. In turn, such thriving organizations help to invest in infrastructure and promote Internet use. Examples include Amazon, Apple, and Google, which have become giants while promoting Internet use and enabling new players to enter the landscape.

In China, the e-commerce marketplace Taobao is beginning to play a similar role. Taobao is China’s largest consumer-facing online marketplace, providing a launching pad for more than six million e-merchants. Taobao has invested heavily to construct payment systems and promote enormous traffic. In turn, these steps have lowered barriers to entry for the small and medium enterprises and microbusinesses that sell on the site. This has also created opportunities for startups in supporting services such as online advertising, IT, express delivery, and warehousing.

The Argentina-based e-commerce platform Mercado Libre has followed a similar path in bringing the online-marketplace model to Latin America. However, most aspiring countries are a long way from achieving this virtuous cycle. A lack of infrastructure correlates with low Internet maturity and use. A shortage of funding sources complicates this problem.

The scarcity of venture capital is a major obstacle to online entrepreneurship in aspiring countries. Inbound foreign direct investment in information and communication technology tends to focus on large telecommunications projects or Internet businesses that have already achieved scale. In most aspiring countries, the high cost of capital constrains entrepreneurial access to loans and early-stage investment. As a result, even entrepreneurs with promising growth often have difficulty scaling.

In some aspiring countries, new ventures focus on providing the tools and capital that innovative startups need to grow. For example, the Nigerian incubator Wennovation Hub takes equity stakes in tech startups and other promising ventures in return for facilities, mentorship, Internet access, legal services, and funding opportunities. Entrepreneurs spend six to nine months in the hub, beginning with a compulsory business training course and then focusing on how to transform the initial product to get it ready for the market, as well as working on successful entry strategies. The long-term goal is to create a thriving startup investment community in Nigeria.

An Internet-Based Policy Agenda

Policy makers in aspiring countries can help online entrepreneurs by lowering barriers to registering a business and by easing access to capital. Some countries have done this through government-funded venture-capital organizations. Morocco’s Maroc Numeric Fund, for example, focuses on providing first-round capital to Internet startups.

Governments can also nurture the Internet ecosystem by promoting low Internet-access costs and broad Internet coverage and by fostering digital literacy. South Africa’s Digital Doorway program created a network of computer systems in rural communities, designed to increase computer literacy and provide informal, community-driven learning programs. Governments can even establish innovation hubs. One promising example is in Kenya, where a public-private partnership is developing the new Konza Techno City as a hub for high-tech companies.

How Operators Can Help

Telecom operators in aspiring countries have a crucial role to play in creating the conditions that Internet entrepreneurs need to thrive. They can promote rapid scale‑up of mobile data services by rolling out last-mile fiber and meeting users’ need for fast and reliable connections. They must optimize network allocation between voice and data and encourage the use of data-compression and buffering technology. The growth of mobile data will help to offset declining voice revenue, and the operators that lead in this area will be the winners in the long run.

The key will be creating consumer demand. Users need clear and predictable pricing, not just affordable rates for Internet services. Operators should implement easy-to-understand price plans, whether based on minutes or applications. To prevent bill shocks, they can reduce speeds when usage caps are reached. Lower-speed bundles and packages could be made available at entry-level pricing. The introduction of lower-cost devices and the establishment of a secondhand smartphone market are other ways to increase usage.

Operators should teach customers how to use their services and make setup hassle free (perhaps by preinstalling Internet services on their devices). They can also offer customers the option to pay a premium for upgraded speeds, creating greater ease of use for consumers. Beyond the consumer market, there will be large opportunities to use the mobile network to deliver services to business customers.

Closing Thoughts

With the growth of the Internet anywhere--whether in the developed or developing world--comes greater threats and possibilities for misuse. There are large and growing concerns regarding piracy, cybercrime, cyberterrorism, and privacy. These are real concerns that require concerted and coordinated action. However, the power of the Internet to propel growth and prosperity far outweighs the risks, and so these concerns should not be an excuse to limit the growth and use of the Internet.

Michael Chui is a principal of the McKinsey Global Institute. James Manyika is a director in McKinsey’s San Francisco office and a director of the McKinsey Global Institute.

This article was originally published on McKinsey & Company's Voices, voices.mckinseyonsociety.com. Copyright (c) 2013.

Last updated: Nov 25, 2013

VOICES FROM MCKINSEY & COMPANY | Columnist

In Voices, McKinsey & Company showcases expert thinking on some of the world's most pressing social problems. The latest series of Voices features on-the-ground stories of how entrepreneurs are making a societal impact across the world. Contributors range from trailblazers in fragile states to founders of multinational companies to forward-thinking millennials.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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